HP Jumps Most in 3 Months as Forecast Beats Estimates

Hewlett-Packard Chief Executive Officer Meg Whitman is eliminating 29,000 jobs through the end of fiscal 2014 to save as much as $3.5 billion a year and shore up profitability as demand for PCs ebbs. Photographer: David Paul Morris/Bloomberg

May 23 (Bloomberg) -- Hewlett-Packard Co., the largest
personal-computer maker, rose the most in three months after its
fiscal third-quarter profit forecast topped estimates as cost
cuts help make up for slumping desktop and laptop demand.

The shares jumped 14 percent to $24.29 at 1:50 p.m. in New
York. Earlier, they traded at $24.33, the biggest intraday gain
since Feb. 22. Through yesterday, the stock had risen 49 percent
this year, compared with a 16 percent increase in the Standard &
Poor’s 500 Index.

Chief Executive Officer Meg Whitman is eliminating 29,000
jobs through the end of fiscal 2014 to save as much as $3.5
billion a year and shore up profitability as PC demand ebbs.
While Whitman cut costs by 8.8 percent and extracted more
earnings from the printing business, she’ll need to reignite
sales to ensure a turnaround takes hold, said Chris Bertelsen,
chief investment officer at Global Financial Private Capital.

“They certainly seem to have stemmed the bleeding,” said
Bertelsen, who is based in Sarasota, Florida, and manages about
$2 billion. “If you can’t give me sales and growth, then it’s
really hard to continue to engineer profits.”

Earnings excluding some items will be 84 cents to 87 cents
a share in the period that ends in July, Palo Alto, California-based Hewlett-Packard said in a statement yesterday. That
exceeded analysts’ average estimate for 83 cents in profit,
according to data compiled by Bloomberg.

“We need to do a better job growing the top line,”
Whitman said on conference call. “We have a shot at growth in
2014, but there’s no question there are headwinds.” At a
meeting with investors last October, Whitman said next year
would be one of “recovery and expansion.”

Profit, Cash

In another indication that lower costs are bolstering
earnings, second-quarter profit excluding certain items was 87
cents a share, compared with 81 cents predicted by analysts.

“She clearly has the company focused on profit and cash
flow and that’s coming through in the earnings,” said Shannon
Cross, an analyst at Cross Research in Millburn, New Jersey, who
rates the stock a hold. “It shows they’re able to drive margin
at businesses that are under significant revenue pressure.”

PC Drop

Sales at the division that includes PCs tumbled 20 percent
to $7.58 billion last quarter, adding to evidence that Hewlett-Packard is getting little relief from last year’s unveiling of
Microsoft Corp.’s new Windows software. Industrywide, PC
shipments plummeted 14 percent in the first quarter, the
steepest decline since researcher IDC began tracking data in
1994.

Dell Inc., which is seeking to go private in a $24.4
billion deal, has been cutting PC prices to win market share,
and has gained ground from Hewlett-Packard in servers.

“We expect Dell to get even more aggressive on pricing,”
making it “very difficult for HP to compete,” Abhey Lamba, an
analyst at Mizuho Securities USA Inc., said in a recent research
note.

Net income for the second quarter fell 32 percent to $1.08
billion, or 55 cents a share.

PC Pricing

Whitman said she wouldn’t get into a pricing war with Dell.

“You saw one of our competitors, Dell, completely crater
their earnings,” said Whitman. “Maybe that’s what you do when
you go private. We’re here to set this company up for the long
term, not just get through this year.”

A 7-inch tablet computer selling for $170 that runs Google
Inc.’s Android operating system has been able to plug a hole in
the company’s lineup, she said. While Hewlett-Packard also sells
a 10-inch tablet for businesses featuring Windows, companies are
still “evaluating” it, Lesjak said.

The PC market slump steps up pressure on Whitman to boost
sales of servers, data storage and networking equipment --
including new machines designed to conserve space and energy.

Whitman, the company’s fourth chief executive officer in
three years, has been rolling out new products to revive growth
after seven quarters of declining sales and profit.

“Meg’s regained some people’s confidence,” said Chris
Whitmore, an analyst at Deutsche Bank AG in San Francisco who
recommends selling the shares.

Printer Profitability

Operating margin in the printing division widened to 15.8
percent from 13.2 percent a year earlier, even as sales in the
division slipped 1 percent. The company has been able to make
ink more affordable in emerging markets and sell new high-end
inkjet printers to businesses, Lesjak said.

Hewlett-Packard is seeking to move past three years of
management tumult -- including the departure of former CEOs Mark
Hurd and Leo Apotheker -- and writedowns of acquisitions
including Electronic Data Systems Corp., handheld-device maker
Palm Inc. and software developer Autonomy Corp.

Ray Lane resigned as chairman last month after coming under
fire from investors, who said management and the board failed to
conduct the proper due diligence before buying Autonomy for
$10.3 billion in 2011. Hewlett-Packard took an $8.8 billion
charge for Autonomy in November.

The company, which hasn’t been acquisitive as it rebuilds
its balance sheet, will make small software and cloud-computing
deals, Whitman said.

2014 Growth

While Whitman has said Hewlett-Packard can return to growth
in fiscal 2014 after two years of declines, analysts are
predicting a 1 percent drop in sales to $111 billion for that
year, according to estimates compiled by Bloomberg.

“Meg has done an excellent job executing in what has been
a difficult environment,” said Bill Kreher, an analyst at
Edward Jones & Co. in Des Peres, Missouri. “The Street is
giving them a pass on this year and perhaps even into next. But
the market would like to see a return to growth in 2014.”